The new Interior Minister, and leader of Italian far-right Lega party, Matteo Salvini, goes on the airport bus and people spontanously sing WWII resistance song 'Bella Ciao'. pic.twitter.com/8vy2P0NwE0

We are all Ordo-liberals now

Both the French and German governments have recently expressed a desire to avoid budget deficits. Bob Hancké examines the history of a ‘dangerous idea’ – Ordoliberalism, or the belief that balanced budgets produce growth.

At what was probably the most unpropitious moment in recent economic history to make the claim, US President Richard Nixon declared that we ‘are all Keynesians now’. In his view, the key problem of macroeconomic management, namely how to stabilise a modern economy, balancing growth (and employment) with inflation, was fundamentally resolved. Less than two years later, the advanced capitalist countries went into a tailspin, world economic growth stalled while both unemployment and inflation shot up.

Wolfgang Münchau, one of the more astute observers of European and German political economy in the Financial Times, recently wrote a column arguing that the strict fiscal policies of the new German Minister of Finance Olaf Scholz, a social democrat (!), will damage Germany’s partners in EMU. He calls it an accident to happen. We did not have to wait long for the next instalment in what could, indeed, be a massive pile-up. The same day, the FT also reported that the French Finance Minister Gérald Darmanin is aiming for a zero deficit. Darmanin wants to restore France’s credibility in Europe. Some context might be useful: the last time France had a zero deficit or a budget surplus was sometime in the 1970s; and France is not really suffering from a poor credit rating, despite 40 years of deficits.

Sado-monetarism and Ordo-masochism

In any case, there seems to be a deeply masochistic streak running through the broad centre and centre-left. It’s one thing for mathematically illiterate right-wing parties such as the Tories in the UK to insist on fiscal discipline – they never really bought into the welfare state, and the ‘necessity’ of sorting out a crisis gives them the opportunity to make savage cuts that hit the poor and wage earners (while leaving the bankers alone).

But it’s a completely different thing for the left and the progressive centre (as Macron and his acolytes like to see themselves) to blindly insist on austerity. Not only is it unnecessary: in both countries and in many other EMU member states the economy is stable and probably simply needs a few years of sustained growth to sort out the budgetary pressures.It is simply counterproductive: if an economy is growing slowly, cutting demand is not a solution but exacerbates the problem.

At best, only well-organised, small, open economies could possibly save their way out of a slump by exporting more as a result of an ‘internal devaluation’ (see this paper by Vassilis Monastiriotis). But that only works if the large neighbour is willing to absorb the costs of that policy and if not too many others have discovered this strategy. The generalised introduction of austerity as an economic adjustment path will therefore logically lead to a prolonged slump, making the problem worse. That is the core of Münchau’s accident waiting to happen.The ideological foundation for such irrational masochistic economic policy is Ordo-liberalism. In essence, this economic doctrine says that once rules are agreed – and the scope and origins of the rules are pretty limited – then you should stick with them, regardless, because that is what increases the predictability of government policies. The problem with this line of thinking is that economies are inherently unpredictable. If we learnt one big thing from Keynes, it must be that the economy is not a system that tends toward stability; instead it is riddled with uncertainty, and that means that stabilising expectations in the light of new elements is the art of policy-making.

And the stricter the rules, as my colleague Jonathan White points out in a recent paper on the perverse effects of German Ordo-liberalism, the more you have to improvise when the unpredictable hits – as it inevitably will. Instead of less politics in the economy, you are likely to end up with more and more arbitrary, ‘unruly’ political interventions.If indeed, to paraphrase Nixon, ‘we are all Ordo-liberals now’, we can only hope that this is its swansong. It is a threat to the economy and to democracy.

We are all Ordo-liberals now

Both the French and German governments have recently expressed a desire to avoid budget deficits. Bob Hancké examines the history of a ‘dangerous idea’ – Ordoliberalism, or the belief that balanced budgets produce growth.

At what was probably the most unpropitious moment in recent economic history to make the claim, US President Richard Nixon declared that we ‘are all Keynesians now’. In his view, the key problem of macroeconomic management, namely how to stabilise a modern economy, balancing growth (and employment) with inflation, was fundamentally resolved. Less than two years later, the advanced capitalist countries went into a tailspin, world economic growth stalled while both unemployment and inflation shot up.

Wolfgang Münchau, one of the more astute observers of European and German political economy in the Financial Times, recently wrote a column arguing that the strict fiscal policies of the new German Minister of Finance Olaf Scholz, a social democrat (!), will damage Germany’s partners in EMU. He calls it an accident to happen. We did not have to wait long for the next instalment in what could, indeed, be a massive pile-up. The same day, the FT also reported that the French Finance Minister Gérald Darmanin is aiming for a zero deficit. Darmanin wants to restore France’s credibility in Europe. Some context might be useful: the last time France had a zero deficit or a budget surplus was sometime in the 1970s; and France is not really suffering from a poor credit rating, despite 40 years of deficits.

Sado-monetarism and Ordo-masochism

In any case, there seems to be a deeply masochistic streak running through the broad centre and centre-left. It’s one thing for mathematically illiterate right-wing parties such as the Tories in the UK to insist on fiscal discipline – they never really bought into the welfare state, and the ‘necessity’ of sorting out a crisis gives them the opportunity to make savage cuts that hit the poor and wage earners (while leaving the bankers alone).

But it’s a completely different thing for the left and the progressive centre (as Macron and his acolytes like to see themselves) to blindly insist on austerity. Not only is it unnecessary: in both countries and in many other EMU member states the economy is stable and probably simply needs a few years of sustained growth to sort out the budgetary pressures.It is simply counterproductive: if an economy is growing slowly, cutting demand is not a solution but exacerbates the problem.

At best, only well-organised, small, open economies could possibly save their way out of a slump by exporting more as a result of an ‘internal devaluation’ (see this paper by Vassilis Monastiriotis). But that only works if the large neighbour is willing to absorb the costs of that policy and if not too many others have discovered this strategy. The generalised introduction of austerity as an economic adjustment path will therefore logically lead to a prolonged slump, making the problem worse. That is the core of Münchau’s accident waiting to happen.The ideological foundation for such irrational masochistic economic policy is Ordo-liberalism. In essence, this economic doctrine says that once rules are agreed – and the scope and origins of the rules are pretty limited – then you should stick with them, regardless, because that is what increases the predictability of government policies. The problem with this line of thinking is that economies are inherently unpredictable. If we learnt one big thing from Keynes, it must be that the economy is not a system that tends toward stability; instead it is riddled with uncertainty, and that means that stabilising expectations in the light of new elements is the art of policy-making.

And the stricter the rules, as my colleague Jonathan White points out in a recent paper on the perverse effects of German Ordo-liberalism, the more you have to improvise when the unpredictable hits – as it inevitably will. Instead of less politics in the economy, you are likely to end up with more and more arbitrary, ‘unruly’ political interventions.If indeed, to paraphrase Nixon, ‘we are all Ordo-liberals now’, we can only hope that this is its swansong. It is a threat to the economy and to democracy.

France called today (8 June) for more ambition from Germany in reforming the euro zone, saying Europe faced a “now or never” moment with rising external threats from the United States and China.

French Finance Minister Bruno Le Maire, speaking in German to a business conference in Berlin, offered the first official response from Paris to new European reform proposals from Chancellor Angela Merkel.

He welcomed the blueprint laid out by Merkel in a newspaper interview last weekend, highlighting her support for French President Emmanuel Macron’s idea for a euro zone budget.

German Chancellor Angela Merkel delivered a long-awaited answer to French President Emmanuel Macron’s call for ambitious European Union reforms on Sunday (3 June), offering olive branches on investment and help for debt-mired eurozone member states.

“But we have a way to go in order to get to a common position that is ambitious and targeted,” Le Maire said, noting that Europe needed “the means” to foster closer economic convergence and to react to crises.

“Our European future is at stake. We must act, it is now or never,” Le Maire added.

Macron has sketched out a far-reaching vision for Europe in a series of speeches over the past year. But until Sunday, Merkel had not offered a detailed response.While supporting the idea of an investment budget for the single currency bloc, she said this should be in the low double-digit billions of euros, far smaller than what Macron wants.

She backed a strengthening of the euro zone’s ESM bailout mechanism, but her calls for it to take on economic surveillance responsibilities that currently housed in the European Commission are unlikely to be welcomed in Paris.

European Commission Vice-President Valdis Dombrovskis welcomed German Chancellor Angela Merkel’s proposals to strengthen the euro area, noting the similarities between the Bundesrepublik’s and EU executive’s ideas on structural reform and investment support.

France and Germany have promised to present a joint reform proposal at a European Union summit on 27-28 June. Le Maire will meet with his German counterpart Olaf Scholz in Paris on Saturday in an attempt to narrow the differences.In his Berlin speech, Le Maire said Europe could not allow the fate of the world to be shaped by China and the United States.

So #Italy is basically parting from its EU allies, siding with Trump and Russia. The new populist government is going to change everything. And Europe can break up again like on 2003 #Iraq war. Achtung. https://t.co/eJet7MAYwf

Italy’s new government says it’s not quitting the euro. Prime Minister Giuseppe Conte, speaking to the parliament that gave him the nod earlier this week, said his administration had no plans to leave the single currency: “We have to reiterate it, leaving the euro has never been considered and it is not being considered.” Not everyone is taking Conte at his word.

In what may be a legal first in Italy, lawyers representing international investors added language to a share-purchase deal of an Italian company to guard against the possibility that the country might voluntarily kick off the process of leaving the single European currency, according to an adviser representing the company selling stock.

Though a deal on the undisclosed transaction was initially struck weeks after the right-wing League and radical 5-Star Movement cleaned up in parliamentary elections, lawyers representing the buyers, who are based outside of Italy, added a so-called “Quitaly clause” before sending it back this week to their Italian counterparts.

According to a screenshot of the document seen by Reuters Breakingviews, the buyer’s legal advisers wrote that a “’Quitaly Event’ means the official initiation of proceedings leading to the Italian Republic leaving the European Union or withdrawing from the Eurozone and exiting the euro, either voluntarily or by means of expulsion.”

The clause is designed to allow the buyer to potentially walk away from the purchase if that happens before the deal receives all the necessary regulatory approvals. While the Italian seller’s counsel said there were discussions about including such language in 2012, amid market worries about Italy’s finances, the idea that Italy would initiate an exit is new. Whether the clause would be legally binding is debatable. And the seller could argue to keep it out of the final contract.

But it captures the heightened risk that Italy’s new government has instilled in global capital markets. The ruling coalition’s original pick for economy minister, eurosceptic economist Paolo Savona, was vetoed by the head of state because of his views on the euro. He was replaced by a figure deemed more reassuring for financial markets. So much for reassurance.

VILNIUS, Lithuania (AP) — Lithuania has welcomed a decision by sports gear company Adidas to remove a tank top with the letters USSR and emblems of the Soviet Union from its online store in the country, after the shirt provoked anger from many in the former Soviet republic.

The Foreign Ministry tweeted Tuesday that the move was “respect for millions of victims of Soviet totalitarian regime (and) is an issue of human decency.”

Lithuania was occupied by the Soviet Union from 1940 to 1990, and today Soviet symbols are likened to Nazi ones and are banned. Officials there earlier said the shirt was “sick with ‘imperial nostalgia.’”

Many Lithuanians demanded online that the women’s red shirt, emblazoned with the letters USSR and a badge with the hammer and sickle symbol, be removed, and threatened to boycott Adidas.

Media in Lithuania reported that similar protests have also taken place in Ukraine.

On social media, the German brand was mocked by people suggesting Adidas start selling Nazi uniforms.

A similar men’s jersey — described as a “replica of the USSR team’s last official jersey” — is sold on Adidas’ U.K. website, which said the shirt is part of a range of products launched ahead of the soccer World Cup in Russia.

It says the range sees “Adidas transform archival soccer jerseys into fashion-forward statement pieces,” and that it “brings back iconic kits worn by the biggest teams of the ’90s.”

There was no immediate reaction from the Herzogenaurach, Germany-based company.